WHAT IS Foreign Direct Investment (FDI)?

WHAT IS FDI??

IN THE SIMPLEST AND EASIEST WAY.

I like to call this time as Ongoing-Ever growing era! Where each and every minute is different and better than the past. Talking globally, each country has its own way of contributing towards the same. The growing technology is a no untouched subject to anyone of us. But no individual country turns out to be self-sufficient. Though you can always point of few such as US, Russia or other European countries but the truth is not as it looks to us.

At current scenario, judging a country with its present progress will certainly not be apt. What I feel is judging a country must be done on its potential. And when we talk of potential, names arising in our mind are India, China and other eastern countries. And the topic we discussing here is a pathway of merging, the future potential and the current technology. And that pathway is FDI or Foreign Direct Investment!

The name is simple that one can easily judge what FDI actually is? Direct investment of a foreign country (home country) into another country (host country). This doesn’t seem to be an all new concept when we already know about Multi-National Corporation (MNC’s). And yes the MNC’s too are the form of FDI.

In past decade or so, Foreign Direct Investment (FDI) has played a major role in internationalization of commerce. Due to effective liberalization all over the world, ease in trade, adaptable foreign policies and simply as an investment, FDI has turned out be a boon.

We just saw MNC’s too are the part of FDI and we know it from decades, since the time of globalization. So how is it different now? That might be an easy question to pop up in our mind.

So for that, let me tell you a stat. the foreign direct investment flows were around $20 billion in 1970’s to $2000+ billion at the present time. And the major changes were seen in the past decade. So what has driven these changes? Well, the answer resides with you. You say which industry has developed the most in the past decade. It’s Information Technology. The era of Internet. The driving factor for all of it.

The classic definition of Foreign Direct Investment (FDI) is with us, that investment from a home country to a host country. But let’s look a bit deeper and see the other forms of FDI. They doesn’t really looks like that of FDI but one way or the other its type of Direct Investment. But at first you should know one thing, until and unless you are Google, Microsoft kind of company yourself, FDI’s are normally achieved with mergers and acquisitions. The majority of FDI is made in equipments, machinery, infrastructure and general fixtures.

Few of the other forms how FDI is achieved are:

Formation of Syndicates for a chore:

Syndicates are the joint ventures which involves three or more parties coming up for performing a particular task.

Let’s understand it with an example ex: Assume a certain infrastructure needs to be developed in India. The task is been given to local XYZ company. Now the XYZ Company needs some machinery not available in the country so a ABC company of Russia, PQR company of France and KLM company of japan extends help. ABC, PQR and KLM had no direct contact, howsoever they all came together via XYZ and helped India develop the infrastructure. This sort of arrangement is also taken as Direct Investment.

Bilateral joint venture

This is no different from what we saw above. But Syndicates often turn out to be failures. Because summing up different corporate cultures is no easy task. That’s why, I used “ FOR A CHORE” because they are normally seen only for a chore and then re-distribute themselves.

Whereas Bilateral ventures comparatively have high success ratio.

Reciprocal Distribution Agreements

I will explain this with an example and that’s it.

ABC is an India based company which manufactures water bottles and XYZ Chinese company which manufactures Lunch Boxes. Now if they want to sell Water Bottles and Lunch Boxes together, both the company might come up together and can sell the mutual products in their home country. This again doesn’t seem as FDI but is a form of investment. ABC serves as a FDI for china and XYZ for India.

Thus we can conclude this as two countries in relatively close countries which come up together for mutual benefits and agree to act as natural distributors for each other.

We just saw in a simple way how FDI can be defined and explained. Though a lot of other things can be included in it but in the straightest way you can define FDI like this. Undoubtedly FDI can turn out to be a lot advantageous for both developing as well as developed countries. The persons opposing FDI can always say it destroys the indigenous industries of any country and majorly the small scale ones. But the truth lies somewhere in the middle. The small and middle level industries with the help of FDI gain the market attention and an opportunity to get actively involved in foreign business activities.

All I can say to Foreign Direct Investment (FDI) proponents and opponents is “THINK GLOBALLY, ACT LOCALLY”.